Investor Nation: Now

Investing In Real Estate: Overcoming The Fear

Most real estate investors are aware of the terrific positive cash flow opportunities with cash-on-cash returns in double digits on single family homes. Yet many have chosen not to invest out of fear that the value of their investment property will fall. Consider what the numbers tell us. Take the example a $60,000 1100 square foot, 3 bedroom 1 bath house in Jackson, Mississippi, already renovated with a tenant paying $700 per month. With a 20% down payment, and allowing for mortgage payments (PITI), property management, maintenance and vacancy, the property will still return well over 10% per year (over 15% if the tenant stays in place and takes good care of the property.) That is clearly a great return on investment. But how much downside is there? Will the $60,000 house materially drop in value? Most people can not afford the down payment or their credit is not where it needs to be and that is why the rental market is doing so well and this is why investors are taking advantage if the fallen market.  There has never been a better time to buy real estate. Are you buying?

What Is Seller Financing?

Seller financing is when the owner takes a second note, or even finances the entire purchase of the property in order to assist the seller in financing a real estate transaction. Usually sellers will offer this option when a buyer has difficulty qualifying for a conventional loan or meeting the 20-30% required bank down payment. Seller financing differs from a traditional loan because the seller does not give the buyer cash to complete the purchase, as does a lender. Instead, it involves extending a credit against the purchase price of the home while the buyer executes a promissory note and trust deed in the seller's favor. 3 Reasons Seller Financing is more attractive thank bank financing:

• Closing fees are less than conventional bank fees.
• Down payment is less.
• Flexible terms.

The following would be an example of a typical owner finance terms: • 5% owner finance fee • Initial down payment of at least 5%-10% of the sale price • Fully amortized term between 24 and 120 months • Interest rate of 8 to 20% In a buyers market, sellers can take advantage of this strategy and the outcome will be both beneficial for both the buyer and seller.

Calculating Cash On Cash Return

Cash-on-cash return is a percentage that measures the return on actual cash invested in an income-producing property. It is one of the most widely used rates of return to measure an income property’s financial performance for the first year. The cash-on-cash return is calculated by dividing the pre-tax cash flow by the amount of cash invested (or down payment) and is expressed as a percentage. For example. If an investor purchased an commercial apartment building that generated $25,000 in before-tax cash flow for the first year of ownership and their cash invested in the property totaled $200,000, cash-on-cash return is equal to 12.5%. This analysis assumes the investor purchases an apartment property for $1,000,000 and finances 80%; thus, requiring 20% in equity or $200,000. Cash-on-Cash Return Calculation: Pre-Tax Cash Flow / Total Cash Invested = Cash-on-Cash Return $25,000 / $200,000 = 12.5% Cash-on-Cash Return The cash-on-cash return is only one of several very important return ratios that measure the profitability of an income-producing property.  You will also want to take into account the Internal Rate of Return ( IRR ).

Locating A Good Contractor

There are many contractors out there who can fix up houses but how do you identify one that will be a good fit for you?  How do you know if they can do the work required to fix your home up to the condition needed to get it rent ready?  There are many questions that need to be asked when working with a new contractor. Here are a few questions you should ask them:

• How long have you been a contractor?
• Are you licensed?
• What kind of warranty do you provide?
• What type of work are you used to doing?

Also you might want to either get a referral from someone who has had them do work for them or get some photo's of work they have done. Last but not least, always, always get everything in writing.  This is very important. This should be a good guide to follow when choosing a contractor.

Joining Your Local REIA

One of the best ways for new or even seasoned investors to get the most current and up to date information is to join your local Real Estate Investment Association ( REIA ). There are many benefits available to members. Some of the benefits to joining your local association are:

• Networking with other investors
• Find local vendors to help build your power team ( Contractor, attorney, CPA, Lenders, wholesale investors )
• Education
• Latest trends happening in your market
• Discounts to many major retail outlet stores

You also might want to check to see if your REIA is associated with the National REIA.  The National REIA provides all the tools for your local REIA to be a success and will give them new ideas on cutting edge technology. You need to identify what you want to get out of joining a REIA.  I enjoy the networking with other local investors and vendors. They can be a big part of your success in helping you grow your business or portfolio.  If you have more than one association in your area you will want to attend each of them and identify which one fits into your plan.

June 2009

Financing Investment Property, 2009

I thought an updated post about financing investment propery would be timely given the extreme lending conditions of the moment.  While conditions seem to be slightly improving lately in the overall market, investor financing remains tough.  Many lenders have moved on to the hungry owner occupant loans which often have thinner files than us real estate investors.  This is despite investors filling in the gap and consuming the foreclosures when no one else was. But let's face it, owner occupant loans are a lot easier than investor loans, and certainly much quicker.  This means your lender can do 2 owner occupant loans in the time it takes to do your loan.  More profit for them and time saved.  This means investment homes are on the backburner. So to survive in 2009 as an investor, you'll need to get creative, be persistent, and find the right lenders.  Because they do exist.  Here are a few of the hot buttons in 2009. Cash Out Loans - Investors are still calling asking if we'll give them cash back in order to buy investment property.  That scenario has become the Dodo bird of our industry.  Fannie Mae requires all parts of the transaction to be documented and further many lenders have overlays so to find a lender allowing cash out is like finding a needle in a haystack.  You'll probably waste a lot of time looking for this loan when you could be findingyour next deal. Zero Down Financing - This actually still exists.  The problem statement is that in order to do this, you having to get the home 5% cheaper than before.  Fannie Mae is underwriting at 75%  refinance instead of an 80% meaning you'll have to buy the deal cheaper on the dollar.  This often means digging into cheaper homes which can increase investor risk.  Also you'll pay significant closing costs in order to structure these deals.  Consider this.  These deals still exist but they are often the homes with the highest appraisal risk.  Which leads me to my next point. Appraisal Risk - With the new Home Valuation Code of Conduct (pdf attached), the lenders are having to use Appraisal Management Companies, meaning they don't get to pick the appraiser out.  This has been a huge blow to much of the creative structuring that has been done in the past to get the zero down deals or cash back.   The risk here is that if your home doesn't appraise for what you thought it would then you'll need to bring cash to the table.  Often unexpected.  Rule of thumb in 2009 - Expect the unexpected, when financing your investment property. Skin in the Game - Cash is king in 2009.  Having cash available to purchase and finance investment properties is becoming the standard.  The more the better.  Did you know that the average investor brings $25,000-$30,000 to the table on transactions?  This is a national average and that 74% of all transactions are traditional transactions via downpayments of 10-20%?    Many properties offered by Investor Nation are in the $3500-7500 down range. Know What You are Doing, or Know Someone who Does - This is a good mantra for 2009.  The opportunities seem to be everywhere.  Carefully executed due diligence will separate the wheat from the chaff this year.  Financing your investment property is going to be tricky. Just because there are 10,000 REO's on the market in particular city doesn't mean they are deals.  In fact everyone seems to be selling a deal these days.  Investigate before you deal.

Investors Represent Only 13% of The Foreclosure Problem

According to a new study by the Nevada Realtors Association, 87% of foreclosures were from owner occupants, not investors.  Although this may be startling to some, it tends to make sense.   Lending to real estate investors wasn't nearly as loose as it was to owner occupants.  I remember owner occupants being able to get 100% loans with a 560 score, recipe for disaster. In Memphis I know of a couple big investors that had 50+ foreclosures definitely impacting the market significantly.  On the owner occupant side that would have had to be 50 individuals.  So I'd be interested to see the stat of the number of people that foreclosed.   When an investor goes under it seems they take big numbers with them, although it seems rare that real estate investors are going under.  At least the ones I personally know. Maybe the fallout of all of this hasn't been fully realized.  The number of investors defaulting may still peak as many were fueled by the continuous purchasing which has dried in the last 6 months.  Also a lot of investors were banking on cash out loans which are now near impossible to find.   Despite all of this I think the news is encouraging.  I'm hoping banks will take notice and loosen up on lending for investment homes.

Choosing A Property Management Company

One of the most critical pieces to your real estate success is having a great property management company.  After you have purchased the home and completed the renovations it is now time to get it rented out. There are many management companies out there to choose from and because of that means you have many companies to consider.  You will want to call at least 3-5 companies to interview them and learn as much as you can about them.  You want to make sure you are going to choose a company that has your best interest in mind.  Here are some things to consider when choosing a management company:

• Monthly fee's
• Size of the management company
• Policy and Procedures
• Areas where they will manage or not manage
• Communication
• Tenant screening process

If you locate a management company that can place a qualified renter in your home within a  short amount of time then you have found a critical  piece to your real estate team.  Management is a critical key to your success as a real estate investor.  Remember,  know what your goals are and make sure your management company will help you reach them.

Creating Notes To Buy Investment Property

Did you know that by creating a real estate note you may purchase some fantastic deals without using any of your own money? Writing notes is like creating money out of thin air. How do you create a note? The easiest way to create a note is by having your title company or real estate attorney do it for you (the title company is usually less expensive). You will only need to provide them with some basic information. How do you use a note to purchase real estate? When someone is desperate to sell their home they will be willing to listen to just about any creative financing technique that will help them solve their problem. You may offer to pay-off their existing mortgage either by taking it subject to or getting your own first mortgage to cover that amount—then give them a note for the balance of the purchase. You see, notes are just paper that will give you control of the property.  This is a way for you to buy real estate without much cash or credit.  Your exit strategy is to sell the note to another buyer for a higher price, pay off the actual owner and you keep what is left over for profit.   Master this method and you will build a large portfolio or investment property that you can hold or sell.